A Guide to S-Corp vs LLC Taxes

This isn’t a beginner’s guide to LLCs and S-Corps. It’s a tax savings breakdown for business owners who are already in the game and want to make sure they’re not leaving money on the table.

First, Let’s Clear Up the Confusion

Here’s what trips most people up: an LLC and an S-Corp aren’t opposites. An LLC is a legal entity. An S-Corp is a tax classification. You don’t have to choose between them—in fact, most business owners who benefit from S-Corp taxation do so by forming an LLC first, then electing S-Corp tax status with the IRS.

So when we’re talking about S-Corp vs LLC taxes, what we’re really comparing is this: should your LLC be taxed the default way, or should it elect S-Corp treatment? That distinction matters, because the tax implications are very different.

How a Default LLC Gets Taxed

By default, a single-member LLC is taxed as a sole proprietorship. All of your business profit, every dollar, flows directly to your personal tax return and gets hit with self-employment tax at 15.3%. That covers Social Security (12.4%) and Medicare (2.9%), and it applies to your entire net profit, not just what you pay yourself.

For a lot of business owners, this is the silent killer. It’s not income tax they’re worried about—it’s the self-employment tax piling on top of it that erodes their take-home.

How S-Corp Election Changes the Equation

When your LLC elects S-Corp status by filing Form 2553 with the IRS, the way your income gets taxed changes fundamentally. Instead of all your profit being subject to self-employment tax, you split your income into two buckets:

A reasonable salary: what you pay yourself as an employee of your own business, subject to payroll taxes.
Distributions: profit paid out above your salary, which is not subject to self-employment or payroll taxes.

That second bucket is where the savings live. Any profit you take as a distribution instead of salary avoids the 15.3% self-employment tax entirely. The more profit you can legitimately shift to distributions, the more you keep.

RainwaterCPA runs the numbers for business owners at no cost, so you can see exactly how much you could save before making any decisions.

Run My Numbers

The Real Numbers: A $150,000 Profit Example

Let’s make this concrete. Say your business nets $150,000 this year. As a default LLC, that entire $150,000 is subject to self-employment tax, meaning you owe $22,950 before a single dollar of income tax is calculated.

Now say you elect S-Corp status and determine that $75,000 is a reasonable salary for your role. You pay yourself that salary, subject to payroll taxes, and take the remaining $75,000 as a distribution. Payroll taxes on the $75,000 salary come to $11,475. The $75,000 distribution? No self-employment tax at all. That’s a tax savings of roughly $11,475 in a single year, just from restructuring how your income is classified.

And that number repeats every year. It compounds. Over five years at that profit level, you’re looking at nearly $57,000 in self-employment tax savings—money that stays in your business or your pocket instead of going to the IRS.

The QBI Wrinkle Most Articles Skip

Here’s something that rarely makes it into the standard S-Corp vs. LLC taxes conversation: the interaction with the Qualified Business Income deduction under Section 199A. The QBI deduction allows eligible business owners to deduct up to 20% of qualified business income from their taxable income, and both LLCs and S-Corps qualify. But there’s a catch.

Your S-Corp salary does not count as QBI. Only your distributions do. That means the higher your salary, the smaller your QBI deduction. At a 24% marginal tax rate, shifting a dollar from distributions to salary doesn’t just cost you in payroll taxes—it also shrinks your QBI deduction, adding more tax liability on top.

This is exactly why getting your reasonable compensation right isn’t just an IRS compliance issue—it’s a strategic tax planning decision. Setting your salary too high costs you on two fronts. Too low, and the IRS will push back. Getting it right requires analysis, not guesswork.

When S-Corp Election Makes Sense

Your business consistently nets $60,000 or more in annual profit
You actively work in your business and can justify a reasonable salary
Your reasonable compensation is meaningfully lower than your total profit
You’re already paying for business tax prep—the incremental cost of an S-Corp return is relatively small
You want to reduce self-employment taxes while preserving pass-through taxation

When It Might Not Be the Right Move Yet

Your net profit is under $50,000—compliance costs may outweigh the savings
Your industry requires a high reasonable salary, leaving little room for distributions
You’re not yet ready to run payroll and meet the additional compliance requirements S-Corp status demands
You’re still in an early growth stage where LLC simplicity outweighs the tax benefit

The Break-Even Point You Need to Know

S-Corp election isn’t free. You’ll need to run payroll, file Form 1120-S annually, and pay more for tax preparation than a standard LLC return. For most business owners, those added costs run between $2,000 and $4,500 per year depending on your CPA and payroll service.

That means your tax savings need to clear that threshold before you’re actually ahead. At a 15.3% self-employment tax rate, you need roughly $13,000 to $30,000 in distributions above your salary to break even on those costs. Once your profit consistently sits above $60,000 to $80,000, the math almost always works in your favor, and it gets more favorable every year as your income grows.

“At $150,000 in profit, most business owners who haven’t elected S-Corp status are handing the IRS an extra $8,000 to $11,000 every single year, not because they owe it, but because no one ran the numbers for them.”

How RainwaterCPA Approaches Entity Structure

At RainwaterCPA, entity structure isn’t a one-time setup decision—it’s a living part of your tax strategy. We look at your current structure, your profit trajectory, your reasonable compensation range, and how an S-Corp election would interact with your full tax picture, including the QBI deduction, exit planning, and any state-level tax implications.

Most business owners we work with didn’t realize how much their entity structure was costing them until we put the numbers in front of them. That’s the difference between compliance-only accounting and proactive tax planning for business owners .

If you’re operating as a default LLC and your business is generating real profit, it’s worth knowing exactly where you stand before you file another return the expensive way.

The Bottom Line on S-Corp vs. LLC Taxes

There’s no universal answer to which business entity structure saves more in taxes, but for profitable business owners who actively work in their businesses, S-Corp election is one of the most consistently powerful tax planning strategies available. The self-employment tax savings are real, they repeat every year, and they’re entirely legal.

The only question is whether you’ve done the analysis to know if it applies to you. If you haven’t, that’s exactly where RainwaterCPA comes in.